Liberty Global: Is The Pain Finally Over? (NASDAQ:LBTYA)

Introduction

Liberty Global (NASDAQ:LBTYA) is a stock that has fallen sharply in recent years. The company sold some business segments resulting in lower free cash flow. The free cash flow is mainly returned to investors in the form of share repurchases. This resulted in a high buyback yield. Despite the generous share repurchases, the share price has fallen 43% over the past 5 years.

Quarterly results were mixed, but I expect Liberty Global to be more competitive when 5G is fully rolled out. The stock’s valuation is low, but I don’t see any other growth catalysts. The stock is a hold.

Third Quarter Results Came In Mixed

Third-quarter figures came in mixed. All business segments had strong mobile net inflows, but broadband net inflows lagged for VodafoneZiggo, Telenet and Sunrise.

Liberty Global remains cautious about the macro-outlook for 2023. Liberty Global’s business sectors are essential to households, schools, businesses and the like. The growing Internet and mobile space is expanding at a rapid pace. The company should expect revenue and profit growth in the coming years; the company is rapidly rolling out a 5G network in Europe. The Netherlands and Switzerland already have more than 97% 5G coverage, while the United Kingdom and Belgium are still gaining ground. 5G is a must have in the connectivity space, and I expect that when 5G connectivity is the new standard in these countries, Liberty Global will be in a competitive position.

Debt Maturities After 2028

Like many other players in the communications sector, Liberty Global has substantial debt. Liberty Global has a sizable net debt of as much as $11.6B on its balance sheet. In 2021, free cash flow was $2.1B making Liberty Global’s net debt 5.5x free cash flow. I consider this a very high ratio. Since 2013, debt has been greatly reduced due to the sale of business units.

The average maturity of the debt is about 6 years, and about 94% of the total debt does not mature until 2028. The debt is fixed-rate and currency hedged. This is very beneficial because the company still has plenty of time to repay the debt at fixed interest rates. Currently, the fully swapped funding cost is low at 3.2%.

29% Buyback Yield, Stock Is Down

Liberty Global pays no dividend, but returns cash to shareholders by repurchasing many shares. Share buybacks increase earnings per share as well as dividends per share. Share buybacks create more demand and less supply in the stock market, which should increase the stock price.

However, Liberty Global’s stock price declined significantly. Despite the high buyback yield of 29%, the stock has already fallen 34% this year. In the past 5 years, the share price has fallen sharply by 43%. This is mainly due to the sale of business units which has caused free cash flow to be lower. The ratio of EV to free cash flow has remained almost the same. Investors have lost confidence in the company, Liberty Global’s business must grow to increase its share price.

In 2021, 74% of free cash flow was returned to shareholders in the form of share repurchases. The buyback return is high at 11% due to the low share price.

Valuation Looks Extremely Favorable

The enterprise value to free cash flow ratio includes debt and cash on the balance sheet. The EV/FCF ratio notes 10.5, slightly above the average of 9.7. Based on this ratio, it cannot be said that the stock is attractively valued. Free cash flow must increase for the company to become more valuable in the future.

The sale of business units leads to lower enterprise value, but also to lower free cash flow. We see a rising book value, and the ever-declining share price makes for attractive price-to-book value ratios.

Liberty Global will first have to reduce its debt. Instead of its huge share buybacks, I would rather see the company grow through corporate acquisitions that increase revenues, profits and free cash flow. In the short term, I don’t see this happening, so the stock gets a hold rating.

Conclusion

Liberty Global is a stock that has fallen sharply over the past 5 years. This is partly due to the sale of several business units. The company showed mixed quarterly results and most of its free cash flow is returned to shareholders in the form of share repurchases. This resulted in a high buyback yield of as much as 11% in 2021. The share repurchases did not result in share price gains. The company has substantial debt of 5.5x free cash flow. The debt matures after 2028 and has a fixed interest rate. Share valuation is low as book value continues to rise. After the full rollout of 5G, I expect the company to have a strong competitive position. Despite the extremely low share valuation, I see few growth catalysts. Therefore, the stock is a hold.